Exclusive: Officials concede deficit target looks doubtful

India will struggle to meet its already swollen deficit target this year after a dismal response to this week's auction of mobile phone licences and a battle to sell stakes in state companies, finance ministry officials privately concede.

Global rating agencies have threatened to downgrade India's sovereign credit rating to junk if it fails to put its fiscal house in order.

Analysts said while the disappointing auction would likely not be a deciding factor, it underscored the challenges facing the government in trying to slash the deficit.

Just last month, subdued tax revenue and higher spending on subsidies forced the government to revise its fiscal deficit target to 5.3 percent of gross domestic product (GDP) for the current financial year from a previous target of 5.1 percent.

In setting the new target, the government was banking heavily on generating billions of dollars from the auction of second-generation (2G) mobile phone licences. But the auction this week yielded just under 25 percent of the targeted 400 billion rupees, catching officials off-guard.

Finance Minister P. Chidambaram said on Friday he was still confident of meeting the 5.3 percent target, although his officials expressed scepticism, saying the poor auction result may have pushed the government's already tough deficit target even further out of reach.

"The task has become more difficult. Some out-of-the-box measures are needed to save the situation," a senior finance ministry official with direct knowledge of the matter told Reuters.

Other finance ministry officials interviewed by Reuters this week gave similar assessments. The officials declined to be identified as they are not authorised to speak to the media.

Seven private economists polled by Reuters said they now expected the fiscal deficit for the year to end-March 2013 to grow to 5.5-6 percent of GDP.

"Slippage is now inevitable. How much slippage happens depends on whether they can actually cut down on any spending area," said Sonal Verma, an economist at Nomura.

FISCAL CREDIBILITY AT STAKE

The government still has some options to get it closer to its fiscal goal.

It could sell its stakes in private firms such as Axis Bank , infrastructure company Larsen and Toubro and hotel and tobacco conglomerate ITC . It can also ask for special dividends from cash-rich, state-run companies.

Besides selling still-unsold telecom spectrum - another auction is possible before March - it could even consider liquidating its land holdings, finance ministry officials said.

But the officials said it was unclear just how much revenue that would generate and whether it would be enough to meet the 5.3 percent fiscal target.

Last year, the fiscal deficit overshot the target of 4.6 percent by 1.2 percentage points. Another big slippage this year could further erode the nation's fiscal credibility.

"It is not business as usual. Everybody is under pressure to meet the (deficit) target," said a finance ministry official. "Time is running out."

The government's battle to mend its finances not only undermines the campaign against persistenly high inflation, but also lowers growth prospects as funding the deficit from domestic savings crowds out private investment.

The government is on track to borrow 5.7 trillion rupees, or 5.6 percent of GDP, by February. Every 0.1 percentage point increase in the deficit is estimated to result in an additional market borrowing of at least 100 billion rupees.

The response to the 2G auction was in sharp contrast with the 2010 sale of faster, third-generation licences, which fetched the government more than $12 billion and helped contain the deficit that year at 4.7 percent.

"We were over-optimistic," a senior economic adviser at the ministry conceded.

Chidambaram pledged last month to nearly halve the fiscal deficit by March 2017. But the plan he presented was short on specifics and was panned by economists.